Student manual
Organisatie en Strategie (FEB11006)
Erasmus Universiteit Rotterdam
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Bas Karreman Thomas Peeters Ajay Bhaskarabhatla Jos Vreugdenhil
ORGANISATION & STRATEGY
FEB11006 AND FEB11006X
Student Manual
Block 5 2015-
Practical information
Staff information
Dr. A. (Ajay) Bhaskarabhatla (IBEB-program)
Room: H12- 18
Email: TE-OS-2016@ese.eur
Dr. T.L.P. (Thomas) Peeters (Dutch-program)
Room: H12- 22
Email: TE-OS-2016@ese.eur
Dr. B. (Bas) Karreman (IBEB- & Dutch-program)
Room: H12- 11
Email: TE-OS-2016@ese.eur
J. (Jos) Vreugdenhil (Assistant)
Room: H12- 06
Email: TE-OS-2016@ese.eur
For an efficient handling of all questions from students of both the Dutch and the IBEB program we prefer to work with one email address only: TE-OS-2016@ese.eur.
Skills tutorials: Please consult SIN-Online Skills channel and Blackboard for information regarding the skills lecture, classes, assignments, and the grading of the assignments and the research project paper. For additional information on skills and the research project, please contact your skills lecturer. For urgent matters please contact Mr. R.L Teeuwen: teeuwen@ese.eur.
The coordinators of the research project are:
R.L. (Luuk) Teeuwen (Skills Assistant)
Room: H12- 06 Email: teeuwen@ese.eur
Dr. B. (Bas) Karreman (Skills-program)
Room: H 12 -
Grading
The final Organisation & Strategy grade is calculated as follows: - Exam: 60%. - Final research project paper: 40%. Exam: The exam consists of 30 multiple choice questions of the type A, B, C, D, and 1 open question with several sub-questions. The multiple choice questions account for 70 % of the exam grade, while the open question accounts for 30% of the exam grade. The exam takes place on Tuesday, June 2 1 from 13 – 16 .30. The retake takes place on Friday, July 15 from 13 – 16.
Additional information
Guest lectures: The guest lectures provide in-depth discussions of the topics discussed in class. Organisation & Strategy is a course that has explicit practical implications and cannot be comprehensively studied without practical examples. The four guest lecturers we invited will provide the necessary practical insights that you need to fully understand a selection of the topics discussed. This year we welcome a very special guest, Dirk Hogervorst, who is one of the managers behind the strategic positioning of the Dutch flower cluster. The guest lectures are not compulsory to attend, although we would like to urge you to join.
Additional question Exam: For the students who fulfilled the requirements of the workgroup assignments, that is 4 sufficient grades (out of 5), an additional open question is added to the exam. The number of points scored for this additional open question compensate for missed points for the regular open questions. Please note, there is a maximum grade of 10 that can be scored for the open questions. Students who do not fulfil the requirements of the workgroup assignments cannot score any points by making the bonus question.
Questions: All questions concerning the course Organisation & Strategy should be asked to the own Teaching Assistant first. Any specific questions can be either asked during the lectures or can be sent to the course e-mail, TE-OS-2016@ese.eur. In addition, we scheduled a question hour in order to respond quickly to content wise questions. During the second part of the final lecture (Friday, June 17), the lecturers will be available to respond to any questions. Therefore, avoid sending content related questions via e-mail, but join the final lecture instead.
Slides: The slides of the lectures will be posted on Blackboard just before the lecture. However, the slides of the workgroups will not be uploaded, except for the mathematical questions. A document with all discussed calculations will be updated each week.
Final research project paper: All the information regarding the skills and the research project paper is provided through the Skills channel on SIN-Online and Blackboard.
Research Talent Award: There is an award for the best paper written by students. In the past, some winners were provided the opportunity to write a professional article to be submitted for publication under the supervision of Bas Karreman.
Last year’s winners are Emilie Barters and Fabian Lips. They wrote their paper on the topic of economies of scale in the health insurance market and made the best impression of the first-year students. According to lecturer Bas Karreman their paper was ‘a good academic approach of a socially very relevant topic’. On the research talent award website you can find more examples of papers and winners.
Research Talent Award website (Dutch): eur/ese/informatie_voor/studenten/bachelorstudenten/vaardighedenonderwijs/bes t_paper_award/
See also (English): eur/ese/english/information_for/students/bachelor_students/skills_development/be st_paper_award/
Workgroups
Workgroup 1 – week 19
Read ‘What is a case study’ Prepare Case 1
What is a case study? The term case study refers to the collection and presentation of detailed information about a particular event, sector, firm or small group, frequently including the accounts of the subjects themselves. This type of study falls into the category of qualitative descriptive research. It looks intensely at an individual or small participant pool, drawing conclusions only about that participant or group and only in that specific context. The focus here is not on the discovery of a universal, generalizable truth, instead emphasis is placed on exploration and holistic understanding of that very situation.
Objectives of case analysis Using cases to learn about the practice of economic subjects is a powerful way to accomplish five things:
- Building skills in conducting strategic analysis in a variety of industries, sectors, and competitive business situations.
- Increasing the understanding of what economists should and should not do in guiding a team, case or business to success in real life.
- Get valuable practice in identifying strategic issues that need to be addressed, evaluating strategic alternatives, and formulating workable plans of action.
- Enhancing a sense of business judgment, as opposed to uncritically accepting the authoritative crutch of the professor or ‘back-of-the-book’ answers.
- Gaining in-depth exposure to different industries, political situations and companies, thereby acquiring something close to actual business experience.
Outline of a case study In general, the goal in preparing the case study should be to end up with a sound, well-supported analysis of the situation and a sound, justifiable set of recommendations about which actions need to be taken or other conclusions about the question asked.
The following approach is suggested:
Skim the case rather quickly to get an overview of the situation it presents, in order to get a flavour of the situation itself. Then read the case thoroughly to digest the facts and circumstances. If we provide you with study questions for the case, now is the time to read them carefully. Try to gain full command of the situation presented in the case. Begin to develop some tentative answers to the study questions.
It’s now time to start writing. a. Identification: It is essential to provide a sharply focused diagnosis of the background of the incident and to demonstrate a good grasp of the issues and key problems (if applicable of the company) early on in the answer.
b. Analysis and Evaluation: This is usually the hardest part of the report. Use the tools and concepts learned to perform whatever analysis and evaluation is appropriate. In writing your analysis and evaluation, bear in mind four things: i. Offer analysis and evidence to back up conclusions. Do not rely on unsupported opinions, over-generalizations, and platitudes as a substitute for tight, logical argument backed up with facts and figures. ii. If the analysis involves some important quantitative calculations, use tables and charts to present the calculations clearly and efficiently. In the body of the answer cite some of the key numbers, highlight the conclusions to be drawn from the exhibits, and refer the reader to the charts and exhibits for more details. iii. Apply the strategic concepts and analytical tools learned and use them in the answer. iv. The interpretation of the evidence should be reasonable and objective. Be wary of preparing a one-sided argument that omits all aspects not favourable to the conclusions. Likewise, try not to exaggerate or overdramatize. Endeavour to inject balance into the analysis and to avoid emotional rhetoric. Strike phrases such as “I think,” “I feel,” and “I believe” when editing the first draft and write in “My analysis shows,” instead.
Apply the concepts and techniques studied to cut beneath the surface of pure opinions and produce sharp insight and understanding. Every case assigned is related to the course and presents an opportunity to usefully apply the course contents. Demonstrate how and when to use the material presented in the text chapters. Check out conflicting opinions and make some judgments about the validity of all the data and information provided. Many times cases report views and contradictory opinions. Evaluating the data and information presented in the case helps to develop capabilities of inference and judgment. Resolving conflicting information ‘comes with the territory’ because a great many of situations entail opposing points of view, conflicting trends, and sketchy information. Support the diagnosis and opinions with reasons and evidence. By all means prepare answers that include all the reasons and number-crunching evidence to support your diagnosis.
c. Recommendations / Conclusion: The final section of the written case analysis should consist of a set of definite recommendations or a sound conclusion to the problem posed. The set of recommendations should address all of the problems/ issues identified and analyzed. It goes without saying that the answer should be well organized and well written. Great ideas amount to little unless others can be convinced of their merit.
cooking. Seeing the opportunity for exporting kerosene from the Black Sea coast through the recently opened Suez Canal to the Far East, Samuel invested in a new tanker, the Murex. In 1892, the Murex delivered 4,000 tons of Russian kerosene to Bangkok and Singapore. In 1897, Samuel formed the Shell Transport and Trading Company, with a pectin shell as its trademark, to take over his growing oil business.
At the same time, August Kessler was leading a Dutch company to develop an oilfield in Sumatra in the Dutch East Indies. In 1896 Henri Deterding joined Kessler and the two began building storage and transportation facilities and a distribution network in order to bring their oil to market.
The expansion of both companies was supported by the growing demand for oil resulting from the introduction of the automobile and oil-fuelled ships. In 1901 Shell began purchasing Texas crude, and soon both companies were engaged in fierce competition with John D. Rockefeller’s Standard Oil. Faced with the might of Standard Oil, Samuel and Deterding (who had succeeded Kessler as chairman of Royal Dutch) began cooperating, and in 1907 the business interests of the two companies were combined into a single group, with Royal Dutch owning a 60 percent share and Shell a 40 percent share (a ratio that has remained constant to this day).
The group grew rapidly, expanding East Indies production and acquiring producing interests in Romania (1906), Russia (1910), Egypt (1911), the US (1912), Venezuela (1913), and Trinidad (1914). In 1929 Shell entered the chemicals business, and in 1933 Shell’s interests in the US were consolidated into the Shell Union Oil Corporation. By 1938, Shell crude oil production stood at almost 580, barrels per day out of a world total of 5,720,000.
The post-war period began with rebuilding the war-devastated refineries and tanker fleet, and continued with the development of new oilfields in Venezuela, Iraq, the Sahara, Canada, Colombia, Nigeria, Gabon, Brunei, and Oman. In 1959, a joint Shell/Exxon venture discovered one of the world’s largest natural gas fields at Groningen in the Netherlands. This was followed by several gas finds in the southern North Sea; and then between 1971 and 1976 Shell made a series of major North Sea oil and gas finds.
During the 1970s, Shell, like the other majors, began diversifying outside of petroleum: - In 1970 it acquired Billiton, an international metals mining company, for $123 million. - In 1973 it formed a joint venture with Gulf to build nuclear reactors. - In 1976–7 it acquired US and Canadian coal companies. - In 1977 it acquired Witco Chemical’s polybutylene division.
By the beginning of the 1980s, Shell had built global metals and coal businesses and established several smaller ventures including forestry in Chile and New Zealand, flower growing in the Netherlands, and biotechnology in Europe and the US.
The 1980s saw a reversal of Shell’s diversification strategy, with several divestments of “non-core businesses” and a concentration on oil and gas – especially upstream. One of Shell’s major thrusts was to increase its presence within the US. After acquiring Belridge Oil of California, it made its biggest
investment of the period when it acquired the minority interests in its US subsidiary Shell Oil for $5. billion.
Shell’s organisation structure prior to 1995 Shell’s uniqueness stems from its structure as a joint venture and from its internationality – it has been described as one of the world’s three most international organisations, the other two being the Roman Catholic Church and the United Nations. However, its organisational structure is more complex than either of the other two organisations. The structure of the Group may be looked at in terms of the different companies which comprise Royal Dutch/Shell and their links of ownership and control, which Shell refers to as governance responsibilities.
The formal structure From an ownership and legal perspective, the Royal Dutch/Shell Group of Companies comprised four types of company: 1. The parent companies. Royal Dutch Petroleum Company N. of the Netherlands and the Shell Transport and Trading Company plc of the UK owned the shares of the group holding companies (from which they received dividends) in the proportions 60 percent and 40 percent respectively. Each company had its shares separately listed on the stock exchanges of Europe and the US, and each had a separate Board of Directors. 2. The group holding companies. Shell Petroleum N. of the Netherlands and The Shell Petroleum Company Ltd of the UK held shares in both the service companies and the operating companies of the Group. In addition, Shell Petroleum N. also owned the shares of Shell Petroleum Inc. of the US – the parent of the US operating company, Shell Oil Company. 3. The service companies. During the early 1990s, there were nine service companies located either in London or The Hague. The service companies provided advice and services to the operating companies but were not responsible for operations. 4. The operating companies (or “opcos”) comprised more than 200 companies in over 100 countries (the 1993 annual report listed 244 companies in which Shell held 50 percent or more ownership). They varied in size from Shell Oil Company, one of the largest petroleum companies in the US in its own right, to small marketing companies such as Shell Bahamas and Shell Cambodia. Almost all of the operating companies operated within a single country. Some had activities within a single sector (exploration and production (E&P), refining, marketing, coal, or gas); others (such as Shell UK, Shell Canada, and Norske Shell) operated across multiple sectors.
Coordination and Control Because executive power was vested in a committee rather than a single chief executive, Shell lacked the strong individual leadership that characterized other majors (e., Lee Raymond at Exxon and John Browne at BP).
The Committee of Managing Directors (CMD) provided the primary linkage between the formal (or governance) structure and the management structure of the Group. The CMD also linked together the two parent companies and the group holding companies.
The combination of diffused executive power at the top together with operating authority and financial responsibility dispersed through nearly 250 operating companies meant that, compared with
Between 1985 and 1993, almost all the world’s oil majors underwent far-reaching restructuring. Restructuring involved radical simultaneous changes in strategy and organisational structure in a compressed time-frame. Key features of restructuring by the oil majors were: 1. Greater selectivity in their strategies, involving the divestment of unprofitable businesses, refocusing around core petroleum and gas businesses, withdrawing from countries where investments were not justified by the returns being earned, and outsourcing those activities that could be performed more efficiently by outside suppliers. 2. Cutting back on staff, especially at the corporate level. 3. Reducing excess capacity through refinery closures and sales and scrapping of oceangoing tankers. 4. Shifting the basis of organisational structure from geographical organisation around countries and regions to worldwide product divisions (many of the majors formed worldwide divisions for upstream activities, downstream activities, and chemicals). 5. “Delayering” through eliminating administrative layers within hierarchical structures. For example, Amoco broke up its three major divisions (upstream, downstream, and chemicals) and had 17 business groups reporting direct to the corporate centre. Mobil also broke up its divisional structure, and created 13 business groups.
Shell in the early 1990s Shell was the only major oil company that did not undergo radical restructuring between 1985 and 1993. The absence of restructuring at Shell appeared to reflect two factors: 1. Shell’s flexibility had meant that Shell had been able to adjust to a changing oil industry environment without the need for discontinuous change. For example, Shell had been a leader in rationalizing excess capacity in refining and shipping, in upgrading its refineries with catalytic crackers, in establishing arm’s-length relationships between its production units and its refineries, in moving into natural gas, and in taking advantage of opportunities for deepwater exploration. 2. Because of Shell’s management structure, in particular the absence of a CEO with autocratic powers, Shell was much less able to initiate the kind of top-down restructuring driven by powerful CEOs such as Larry Rawl at Exxon, Jim Kinnear at Texaco, Serge Tchuruk at Total, or Franco Bernabe at ENI.
The early 1990s were difficult years for the industry. The fall in oil prices to the mid-teens meant that returns from the traditional fount of profit – upstream – were meager. At the same time, refining and chemicals suffered from widespread excess capacity and price wars.
Evidence of the potential for performance improvement through restructuring was available from inside as well as from outside the Group. During the late 1980s and early 1990s, several Shell operating companies – notably those in Canada, the US, UK, South Africa, Germany, Malaysia, and France – showed the potential for organisational restructuring, process redesign, and outsourcing to yield substantial cost savings and productivity improvements.
The essential issue, however, was to prepare Shell for an increasingly difficult business environment: We anticipate increasingly dynamic competition. We see the business conditions of today, with flat
margins and low oil prices continuing into the future. In addition, there will be no let up on all players in the industry to strive for higher productivity, innovation quality and effectiveness.
The change process The driving force behind the redesign was the desire to have a simpler structure in which the reporting relationships would be clearer and thus to allow the corporate centre to exert more effective influence and control over the operating companies. A simpler structure would help eliminate some of the cost and inertia of the head office bureaucracies that had built up around Shell’s elaborate committee system. There was also a need to improve coordination between the operating companies. This coordination, it was felt, should be based upon the business sectors rather than geographical regions. Globalization of the world economy and the breakdown of vertical integration within the oil majors had meant that most of the majors had reorganized around worldwide business divisions. As was noted above, most of the majors formed upstream, downstream, and chemicals divisions with worldwide responsibility. For Shell, achieving integration between the different businesses within a country or within a region was less important than achieving integration within a business across different countries and regions. For example, in exploration and production, critical issues related to the development and application of new technologies and sharing of best practices. In downstream, the critical issues related to the rationalization of capacity, the pursuit of operational efficiency, and the promotion of the Shell brand.
In the meantime, two totally unexpected events only increased the internal momentum for change. While Shell faulted itself on its ability to produce a return on capital to meet the levels of its most efficient competitors, in managing health, safety, and the environment and in responding to the broader expectations of society, it considered itself the leader of the pack. Then came the Brent Spar incident. A carefully evaluated plan to dispose of a giant North Sea oil platform in the depths of the Atlantic produced outcry from environmental groups, including Greenpeace. Consumer boycotts of Shell products resulted in massive sales losses, especially in Germany. Within a few months, Shell was forced into an embarrassing reversal of its decision.
A few months later the Nigerian military regime executed Ken Saro-Wiwa, a prominent Nigerian author who had protested Shell’s poor environmental record in his country. Again, Shell was found to be flat-footed and inept at managing its public relations over the incident. The handling of the Brent Spar and Nigerian incidents convinced many that Shell’s top management was both unresponsive and out of touch.
The new Shell structure The central feature of the reorganisation plan of 1995 was the creation of four business organisations to achieve closer integration within each business sector across all countries. It was intended that the new structure would allow more effective planning and control within each of the businesses, remove much of the top-heavy bureaucracy that had imposed a costly burden on the Group, and eliminate the power of the regional fiefdoms.
The formal structure The principal changes in the formal structure were changes involving the identities and roles of the service companies to create a closer alignment with the new management structure.
Questions Just imagine that you have finished your economics studies at the Erasmus University and you have just started as a consultant at McKinsey & Company (one of the world most renowned organisation & strategy consultancy firms). You have become part of the Oil division. Your first assignment is to advice Shell how to renew their firm strategy. There is only one problem: You just started and you know nothing of the firm’s current organisation and strategy! So before designing a new strategy your first task is to become familiar with the history and the (current) organisation and strategy of Shell, as described in the case. The questions below will guide you through that process.
(Boundaries of) the firm 1. Provide an explanation why Marcus Samuel and Henri Deterding joined forces in 1896. 2. Since the beginning of the 1900s, Shell expanded rapidly by acquiring oil producing interests in various countries all over the world. Provide an explanation why Shell followed this explicit expansion strategy. 3. Shell entered the chemicals business in 1929. Provide an explanation why Shell followed this diversification strategy. 4. According to the text, Shell is involved in “Upstream” activities, such as exploration and production of crude oil and “Downstream” activities, such as oil products (e. gas stations). Provide an explanation why Shell can(not) be considered a vertically integrated firm.
The market 5. Which firms would you identify as the main competitors of Shell? Why? 6. Between the early 1970s and the early 1990s, the world oil industry was transformed rigorously. Provide an explanation why this transformation had an effect on the volatility of the oil prices. 7. New entrants caused the transformation of the oil industry between the early 1970s and the early 1990s. Do you think it is currently easy to enter the oil industry? Argue why (not)?
The environment 8. In order to stay competitive in a changing business environment Shell went through different phases of restructuring. How did Shell reorganize to sustain its competitiveness? 9. Shell has always invested considerable funds in new technologies. According to the text Shell had been able to adjust to a changing oil industry environment by, among other things, taking advantage of the opportunities for deepwater exploration. Explain how a new technology such as deepwater exploration may contribute to the competitive advantage of Shell.
Workgroup 2 – week 20
Prepare Case 2 and 3 Case 2: Narayana Hrudayalaya: A Model for Accessible, Affordable Health Care? Cardiac surgeon Dr. Devi Shetty is on a mission to build 5,000-bed “health cities” across India, encouraged by the success at his nine-year-old Narayana Hrudayalaya hospital in Bangalore. He has contained costs by tweaking processes, driving hard bargains and negotiating creative partnership deals, but faces challenges in replicating that model on a bigger scale. Shetty wants to make quality health care accessible and affordable using economies of scale, or the cost advantages businesses obtain due to expansion. His hospital in Bangalore focuses on cardiac medicine but he wants to extend the model to other specialties, in addition to other locations. Shetty believes his success could lead to a new health care model not only for India but perhaps also for the world. “The first heart surgery was done over a hundred years ago but even today only 8% of the world’s population can afford heart operations,” Shetty notes. “In India, around 2 million people require heart surgeries every year but all of [the country's doctors] put together perform only 80,000 to 90,000 surgeries a year.... We clearly need to relook and change the way things are being done.” At his Narayana Hrudayalaya Institute of Cardiac Sciences in Bangalore, the 56-year-old Shetty is doing just that. Patients at his hospital get cardiac care at a cost lower than any other hospital in the country and at a fraction of what it would cost elsewhere in the world, a feat accomplished through what Shetty refers to as “process innovation.” Shetty, who has been in the medical profession for close to 25 years and worked at Guy’s Hospital in London, the Birla Heart Research Foundation in Kolkata (formerly Calcutta) and the Manipal Heart Foundation in Bangalore before branching out on his own, was formerly personal physician to Mother Teresa. His interactions with her, he notes, not only offered the opportunity to closely observe the famed humanitarian’s charitable work but also caused the doctor to begin thinking about how quality health care could be made widely accessible and affordable. That was how Shetty came to the conclusion that the health care industry needs more process innovation than product innovation. The industry “does not need a magic pill or the fastest scanner or a new procedure,” he states, but instead requires improvements that lower the cost of medical attention and make it more widely available. Shetty’s premise of economies of scale is not radical; in fact, the doctor describes his way as “the Walmart approach.” What sets him apart, however, is that he has successfully adapted the method to a field as complex and costly as cardiac care. “There is no doubt that he has created a very distinct model to take cardiac care to the masses,” notes Vishal Bali, chief executive officer of Fortis Hospitals, a prominent Indian healthcare group. Now Shetty is ready to aim higher. India currently has around 0 hospital beds per thousand people; the key to better aligning those numbers with the population, he states, is creating a chain of large “health cities” across the country. To set the ball rolling, Shetty spearheaded the creation of a 1,400-bed cancer and multispecialty hospital — the largest cancer hospital in the country — at the Bangalore campus. A women and children’s hospital and another for nephrology are also in the works. In addition, the Bangalore facility — which is set to expand to a total of 5,000 beds over the next three years — includes a 500-bed orthopedic hospital, an eye hospital, research facilities and room for about 50 training programs.
a 12% stake in the company. Kiran Mazumdar-Shaw, chairman and managing director of biotechnology firm Biocon owns a 2% stake, and Shetty and his family own the remainder of the company. Shishir Jain, executive director at JP Morgan believes Shetty has shown that “it is possible to fulfil a great social need without compromising on the profitability.” Santosh Senapathy, managing director of PineBridge Investments adds that “Narayana Hrudayalaya will change the way healthcare is delivered across the world.”
Innovations in Operations Indeed, Shetty has already turned some standard industry practices on their heads. One of his first innovations when he set up Narayana Hrudayalaya in 2001 was in the way doctors are compensated. Typically, cardiac surgeons are paid per surgery and their costs constitute a significant proportion of a hospital’s total expenses. Shetty invited his staff physicians to work for fixed salaries; he did not pay them less than what they would have normally taken home at the end of the month, but he required doctors to perform more surgeries, bringing down the cost per procedure. This approach continues to be one of the core savings areas at Narayana Hrudayalaya. In addition, Shetty’s father-in -law — who was in the construction business — built the first hospital for him, keeping costs to the minimum. Shetty claims he passed on those savings to patients, and maintains that, even today, construction costs at his hospitals are less than half of that for others. “The way we design the hospitals and our close monitoring of our projects help us to keep a very tight control of our construction costs,” notes Shetty’s son Viren, an engineer and director at the hospital. Shetty’s two other sons are studying medicine. In the initial days of Narayana Hrudayalaya, patients came because of Shetty’s skill and his reputation. The cost savings he offered started attracting customers in greater numbers. Apart from the surgeries, the Bangalore campus treats about 2,500 people daily in its out-patient department. The increasing volumes in turn have helped lower costs in many ways, staff says. Instead of buying surgical gloves in India, for example, Narayana Hrudayalaya saves about 40% by importing them in container loads from Malaysia. The hospital has moved to digital X-ray technology, saving on the recurring cost of film. Most hospitals use their CT scanners, MRI (magnetic resonance imaging) and other machines for only eight hours a day, but Narayana Hrudayalaya uses them for 14 hours and offers these tests to the patients at lower rates in the late evenings. As volumes increase, per unit costs naturally come down. For procedures like blood gas analysis, Shetty’s team convinced the equipment vendor that, instead of selling the machine to the hospital, he could simply park it there and make his money by selling the chemical reagents required for the test. The hospital saves on the cost of the machines while the vendor also profits. For the past six months, another vendor has parked his catheterization laboratory equipment at the hospital free of charge. The deal came together because the vendor wants to use Narayana Hrudayalaya as a referral, Shetty notes, with the idea that if he can show that his equipment can cope with the patient volumes at Narayana Hrudayalaya, it can work anywhere, he adds. The high patient volumes help Shetty drive a hard bargain with vendors when negotiating prices for everything from basic supplies to sophisticated medical equipment. The new cancer hospital, for example, purchased two linear accelerators (for producing X-rays) that typically cost US$6 million each for the price of one machine. The cost of the machines was spread out, interest-free, over seven years. “Given [the hospital's] volumes and Shetty’s own credibility, every negotiation is as tough as it can be. He certainly gets his pound of flesh,” notes V. Raja, president and CEO of GE Healthcare South
Asia, who has been associated with Narayana Hrudayalaya from the beginning. With Shetty now on an expansion drive, Raja is in discussions with him to see how they can structure deals that enable Shetty to achieve economies of scale while bringing more business for GE Healthcare.
Testing an Untested Model Shetty’s model of 5,000-bed health cities has its share of risks and challenges. It remains to be seen if the doctor can replicate his success in volume-based cardiac care across specialties and cities. He is also considering setting up health care facilities in the Cayman Islands and Malaysia. Observers say to succeed, Shetty needs to build organisational and management bandwidth; create teams of medical professionals that share his vision and are willing to work hard; put in place robust processes, and raise the required funding. “The scalability of any model is based on the creation of an organisational structure,” says Bali, of Fortis. “One does not see this at Narayana Hrudayalaya. It has been around for many years and by now the structure should have emerged. One will have to wait and watch if Shetty can indeed scale [his model] beyond one or two institutions.” Amit Varma, president healthcare at Religare Enterprises, a financial services group and director of critical care medicine at the Fortis Escorts group of hospitals, raises another concern. Varma was part of Shetty’s team at Manipal Hospital and at Narayana Hrudayalaya. “The intention is absolutely right but there is a base cost to any procedure and you can bring that down only to a certain level,” he notes. “There is a tipping point beyond which the volume that you do will have an adverse impact on the quality. What that tipping point is remains to be seen.” But Girdhar Gyani, CEO of the National Accreditation Board for Hospital and Healthcare Providers believes a commitment to delivering quality service is part of the culture of strong teams. “Shetty’s team in Bangalore is top-of-the-line in terms of quality and I am confident that the rest of the facilities that he builds will be the same too. Shetty is a transformational leader who can bring about a sea change in this industry.” Mazumdar-Shaw of Biocon, who owns a stake in Shetty’s company, says the doctor brings a missionary work ethic to his efforts and has attracted a talented and committed team of doctors, nurses, paramedics and professionals. She credits Narayana Hrudayalaya with consistently focusing on training and developing specialized skills. “I have no doubt that Narayana Hrudayalaya is scalable in India and Shetty’s concept of 5,000-bed health cities is the way to go. India’s medical talent pool is vast and can certainly sustain this growth.” Raja of GE Healthcare also adds his vote of confidence: “This is a pretty much untested model across the world but Dr. Shetty is fully committed to it and, if anyone can, he can.”
Wharton University of Pennsylvania. (2010, July 1). Narayana Hrudayalaya: A Model for Accessible, Affordable Health Care? Retrieved from Wharton University of Pennsylvania
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Universiteit: Erasmus Universiteit Rotterdam
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